Chereb: What type of recovery is ahead?

By |  May 11, 2020
Head shots captured on 9/4/2013 for North Coast Media. All photos by Hunter Harrison of Hunter Photographic, a Cleveland wedding photographer. More on the web at www.hunterphotographic.com.

Chereb

Let’s discuss letters, density and debt bombs.

A question now asked is this: Will the recovery be V-shaped or U-shaped? Our answer for construction aggregate is broken down into the three major segments: residential, nonresidential and nonbuilding.

Residential

For residential, we think the recovery will be V-shaped. Housing is taking a beating just like every other segment of the economy, but the decline thus far has been balanced (with demand and supply dropping in concert).

Hence, no price crash. As the economy reopens, demand for housing will increase with lower-density areas doing especially well. It will take a few years to recover, but it will be straight up after this summer.

Nonresidential

For nonresidential, the recovery will be L-shaped. The changes that have been at work for the past five years (i.e., the Amazon Effect) have been accelerated due to the coronavirus.

Retail will not recover to its prior level for many years – if ever. Office construction may recover half of what is being lost and not hit its prior peak for a decade. The only bright spot is warehousing, which should expand.

Nonbuilding

Photo: Zach Mentz

Aggregate demand will vary somewhat differently in the years ahead within the residential, nonresidential and nonbuilding markets. Photo: P&Q Staff

For nonbuilding, the recovery will be W-shaped. At first, there will be a burst of projects as the economy opens. That phase continues through most of 2021, but then a decline emerges in late 2021 and into 2022 as state and local governments wrestle with much lower revenues as a result of the virus.

While the federal government will try to provide new funding, it will not be enough to fill the enormous revenue gap that is building. Eventually, as the economy really gains steam, after 2021, infrastructure demand will exceed the 2019 peak.

Some other factors will impact the level and location of construction demand in the future, including density. We will see the desire for lower-density living environments. This will be the first time in more than 50 years that the winds are changing from higher density to lower density. At this time, we do not know if it will be a gentle breeze or a gale.

Also, a few years from now we will begin to discuss the “Debt Bomb” that we have created. For those who say we can never pay back our national debt, you are right. We are not going to pay it back.  We will do something unusual – say issue 100-year prosperity bonds that major banks will be required to buy.

When all of these factors are combined, it means a 2020 decline in aggregate demand of more than 7 percent and a slight decline for 2021. By mid-2021, some gains begin but big improvements do not show up until 2023. This means there will be smaller aggregate price increases than normal.

David Chereb, Ph.D., is with S-C Market Analytics (SC-MA), which produces customized market forecasts by major segments of construction, from the county level up. Clients use SC-MA market intelligence reports for business planning and acquisition analyses in aggregate, ready-mix concrete and cement. For more information, visit sc-marketanalytics.com.


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